Hess Midstream’s (NYSE:HESM) growth represents an attractive option for value investors

Hess Midstream () is a leading player in the midstream energy sector.NYSE: HESM) has a steady revenue stream supported primarily by contractual obligations and offers potential for future expansion. With a generous dividend yield of 6.85%, the company, which has seen shares gain over 30% in the past year, is an attractive option for income-oriented investors seeking value.

The stable model of Hess Midstream

Hess Midstream is a midstream company that owns and operates various midstream assets. HESM’s assets include oil, gas and produced water handling facilities located primarily in the highly productive oil producing areas of the Bakken and Three Forks Shale deposits in the Williston Basin of North Dakota.

The company is engaged in gathering, processing and terminaling. The gathering division relies on a 2,220-kilometer pipeline network to transport natural gas, crude oil and produced water to processing and export terminals. The processing division operates world-class facilities with a total capacity of over 600 million cubic feet per day. Finally, the terminal division focuses on the storage, transportation and export of crude oil and natural gas liquids (NGLs).

The company’s operational stability is strengthened by its long-term commercial contracts that run through 2033 with the expectation of further extensions. In addition, Hess Midstream’s business model is fee-based and provides minimum volume commitments through 2026. This reduces the unpredictability associated with commodity prices and provides a steady source of revenue, reinforcing the strength of midstream companies in the energy sector.

Latest financial results of Hess Midstream

The company reported mixed results for the first quarter of 2024. Revenue of $355.60 million beat expectations of $351.86 million and represented a significant increase from the year-ago period of $305 million. Adjusted EBITDA increased 15% year-over-year to reach $276 million. However, reported earnings per share (EPS) of $0.59 fell short of consensus estimates of $0.64, partly due to higher income taxes and increased interest expense from loans and share repurchases.

The company recently completed a $100 million repurchase transaction, purchasing over 2.7 million Class B shares from its sponsors. The move, funded with cash reserves, resulted in the cancellation of an equal number of Class B shares, simplifying the company’s ownership structure. In addition, the company’s board of directors announced a quarterly cash distribution of $0.6516 per Class A share, representing an increase of approximately 2.7% quarter-over-quarter.

What is the price target for HESM shares?

Analysts covering the company have taken a cautiously optimistic stance on the stock. For example, UBS analyst Manav Gupta recently raised the price target on the shares from $38 to $40, but maintained a buy rating, citing expectations of an increase in EBITDA in the second quarter due to increased volume.

Overall, Hess Midstream is rated a Moderate Buy based on the recommendations and price targets recently set by three analysts. The average price target for HESM shares is $38.33, which represents a potential upside of 3.45% from current levels.

The stock has been gaining steadily, rising over 88% over the past three years. It is trading at the upper end of its 52-week price range of $25.98 to $37.31, showing continued positive price momentum. It is trading above its 20-day (36.16) and 50-day (35.47) moving averages. With an EV to EBITDA of 5.956x, the stock appears to be undervalued relative to industry peers. The industry average for oil and gas midstream is 9.725x.

Final analysis on HESM

Hess Midstream’s stable earnings, derived from a predictable, fee-based business model, are coupled with a generous 6.85% dividend yield, making it a valuable proposition for income-seeking investors. Despite mixed results in the first quarter of 2024, the company reported significant year-over-year increases in revenue and adjusted EBITDA. Shares show positive momentum and trade at relative value, making them an attractive opportunity in the midstream energy sector.

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